Doosan Babcock Ltd v Comercializadora de Equipos y Materiales Mabe Limitada

[2013] EWHC 3010 (TCC ), [2013] EWHC 3201 (TCC)

Doosan contracted to supply two boilers to Mabe for a power plant in Brazil. In accordance with the Contract, Doosan arranged performance guarantees. The guarantees entitled Mabe to payment on demand and were to expire upon the issue by Mabe of Take-Over Certificates (“TOCs”) by 31 December 2013, whichever was earlier. By the terms of the guarantees the provider of the guarantee undertook to pay Mabe:

“on receipt of your first demand on us in writing stating that [the Claimant] has not performed its obligations in conformity with the terms of the Contract.”

As Mr Justice Edwards-Stuart noted: “This wording could hardly be wider ... the bank giving the guarantee is concerned only with the terms of the demand, not with the question of whether or not it is justified.”

During July 2013 Doosan requested that Mabe issue the TOCs on the grounds that the boilers had been taken into use in November 2012 and May 2013 respectively. Mabe refused and relied upon a provision in the Contract permitting it to withhold the TOCs if the boilers were only put into use as a “temporary measure”.

During August 2013 Mabe notified a claim for US$57m for delayed supply and defects in the boilers. In reply Doosan requested that Mabe undertake to not make any demand on the guarantees without giving at least 7 days’ notice. Mabe refused to give the undertaking so Doosan applied to the TCC for an interim injunction, contending that in refusing to issue the TOCs, Mabe was in breach of the Contract and was relying upon this breach to enable a demand for payment. At the first hearing on 4 October 2013 the Judge agreed with Doosan that the Court had jurisdiction to grant relief under section 44(3) of the 1996 Arbitration Act and listed the matter for a return date in two weeks’ time in order to allow the parties time to prepare evidence upon whether or not the boilers were operating on a “temporary measure” basis.

At the restored hearing, Doosan maintained that the boilers were in commercial use, relying upon press releases indicating that the boilers had exported over 7,500 hours of power to the grid since installation. Doosan submitted that where Mabe was relying upon its own breaches of the Contract to facilitate a call on the guarantees, it could show a strong case, entitling the Court to grant interim relief. Mabe argued that Doosan did not have a strong case because it had misconstrued the contractual requirements for performance tests prior to the issue of the TOCs.

Given that the Contract provided for arbitration, the Judge made it clear that the Court had no jurisdiction to make final findings on the facts or to finally determine the proper meaning of the Contract.

On the facts the Judge found that Mabe had taken the boilers into commercial use. He also found that Mabe had not complied with the contractual requirements to show that use of the boilers as a “temporary measure” was in accordance with the terms of the Contract or as agreed by the parties. In deciding whether to grant an interim injunction, the Judge recognised the principles set out in the American Cyanamid case and more recently in Simon Carves v Ensus UK (Legal Briefing, 12 of 2011) where Mr Justice Akenhead said that a claimant must show that it has a strong case that the terms of the underlying contract, in relation to which the bond had been provided by way of security, clearly and expressly prevented the beneficiary from making a demand under the bond. If so, the beneficiary could be restrained by the court from making such a demand.

The Judge rejected Mabe’s argument that Doosan had misconstrued the Contract. He concluded that Doosan’s factory tests were sufficient and that whilst any failure to achieve the performance tests would create a liability for liquidated damages, it would not justify non-issue of the TOCs. The Judge therefore agreed that Doosan had demonstrated a strong case. In granting Doosan interim relief, the Judge drew an analogy with the Simon Carves case where the parties had agreed expressly that the beneficiary’s right to make a demand on the guarantee was either qualified or would be extinguished if certain events occurred.

Applying the principle set out by the House of Lords in Alghussein Establishment v Eton College, Mr Justice Edwards-Stuart made an alternative finding that interim relief could also be granted on the basis that Mabe should not be permitted to benefit from its own wrong. Doosan had a strong case that Mabe’s refusal to issue the Take-Over Certificates was a breach of contract. It was as a result of that breach, and only that breach, that Mabe was in a position to make a call on the guarantees. If Mabe had issued the certificates, the guarantees would have expired and so there would be no guarantee on which to make a call.

The courts will usually refuse to restrain a bank from making payment under an on-demand instrument unless there is clear evidence of fraud. Doosan submitted that it could not show fraud as Mabe had not yet made a call on the guarantees but that it should not have to because the position was different where it could dispute the validity of Mabe’s right to make a call. Here, the right to make a call under an on-demand guarantee was qualified by the terms of the underlying contract.

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